Capping public sector exit payments

11 April 2019

Back in 2015, the Government announced its intention to end 'six-figure exit payments' for public sector workers, and on 31 July 2015 published a consultation document seeking views on the proposals. 

The primary power to impose a £95,000 cap was included in the Small Business, Enterprise and Employment Act 2015, as amended by the Enterprise Act 2016. Draft regulations setting out the detailed provisions were published in November 2015, and originally expected to take effect in autumn 2016. However, the regulations were not brought into force and disappeared off the legislative radar.

The regulations have now resurfaced in an amended form and a further consultation has now been issued. No implementation date has yet been announced. Alongside the draft regulations, draft guidance has been published to explain how relevant public sector employers are expected to implement the legislation.

Which public sector employers are covered?

The cap will eventually apply to the whole of the public sector, but with exemptions for certain sectors such as the armed forces and security services. The Government is planning to adopt a phased implementation of the cap, but in effect the majority of public sector employees will be covered in the first stage: the civil service, NHS, academy and maintained schools, local government (including the fire service) and police forces. A full list of the bodies in scope of the regulations is set out in Schedule 1 of the regulations.

Which payments are included in the cap?

The cap applies to payments made in consequence of the termination of employment or office, whether or not a contract of employment is in place. It, therefore, applies to office holders as well as employees. It applies to the following payments:

  • redundancy payments (whether statutory or contractual)
  • payments to reduce or eliminate an actuarial reduction to a pension on early retirement
  • payments of compensation under a COT3 or settlement agreement (but see below for circumstances when the cap can be relaxed in respect of such payments)
  • any severance or ex gratia payment
  • payments in the form of shares or share options
  • any payment on voluntary exit
  • payments in lieu of notice (unless such payment does not exceed one quarter of salary)
  • payments to extinguish any liability under a fixed term contract
  • any other payment in consequence of termination of employment or loss of office.

The cap imposed under the regulations will take precedence over existing contractual agreements, regulations and other schemes already in place that make more generous provision for exit payments.

Exempted payments and relaxation of the cap

Payments in respect of death in service or for incapacity as a result of accident, injury or illness are excluded, as well as certain payments under the Firefighters’ Pension Scheme. Payments made pursuant to an order of any court or tribunal are also excluded.

In calculating whether the cap applies, employers must take into account all exit payments received by the individual within a 28 day period, including payments from another public sector employer. However, an individual is entitled to receive a statutory redundancy payment from a second relevant authority, even if this means the total amount exceeds the £95,000 cap.

The regulations also include a power for the cap to be relaxed in accordance with HM Treasury Directions. Importantly, these Directions provide for a mandatory relaxation of the cap where payment is made as a result of TUPE, where payment is made to settle a whistleblowing or discrimination complaint and certain payments made by the Nuclear Decommissioning Authority. Discretionary relaxation of the cap is also permitted in exceptional circumstances, exercisable by a Minister of the Crown and certain delegated authorities (including the full council of a local authority) and subject to prior approval from HM Treasury.

The consultation closes on 3 July 2019.

The content of this article is for general information only. For further information please contact Liz Stevens or a member of Birketts' Employment Law Team. Law covered as at April 2019.